Problem: You are named CEO of a firm called PullUps. The firm produces diapers for "toddlers" as well as for old age. The company has a new patented technology that allows it to produce diapers at a lower cost and faster than its only rival, a firm called Oldies. PullUps uses will use this technological (and cost) advantage to be the first to choose its profit-maximizing output level. The inverse demand function for this type of diapers is P = 500 - 2Q. However, due to its unique patented technology, PullUps costs are Cp(Qp) = 2Qp, while Oldies costs function is CO(QO) = 4QO.
Required:
a. Determine Pull Ups profit-maximizing output level? What about Oldies'?
b. Determine the market's equilibrium price?
c. According to a) and b), how much profit does each firm earn?
d. If we ignore issues (let's assume the market for this product is very small), would it be profitable for your firm to merge with Oldies? If not, explain why not; if yes, please come up with an offer that would allow you to profitably complete the merger